Rich vs Poor: Solving the Economic Divide ~ Should the government control wages?

Introduction: 
Ric Stubbs is one of my friends that I met on my mission in Taiwan.  He is very smart and I respect his opinions.  Ric has been posting multiple articles on Facebook about a maximum wage ratio or increasing the minimum wage.  We have been debating back and forth over whether or not implementing controls on wages is a good thing.  Ric has given me permission to post our debate on this blog.  The raw text of the debate is located at the bottom of this post.

Debate over implementing a Maximum Wage Ratio

Debate on raising the Minimum Wage

Minimum Wage Debate continued ~

Conclusion:

While I don't agree with implementing government controls on wages on principle, I understand changes in technology may drastically alter our future way of life and necessitate us to operate by new principles.  I agree with the economic goal of boosting the economic status of the lower half of America, but I don't think that we should sacrifice free market principles nor allow greater government control of the marketplace.  I hope that our generation will find legitimate ways to accomplish this goal and boost economic fairness while maintaining our freedoms.

RAW TEXT

MAXIMUM WAGE RATIO

Ric Stubbs	Thoughts?  http://www.cnn.com/2013/11/21/opinion/sutter-swiss-executive-pay/index.html?sr=sharebar_facebook
Seth Garrett	I like freedom. CEO's get paid more because the company owners think that they are worth more. Free market principles say that you should give people the freedom to decide the value of things. Artificially controlling the value of something has never made the economy better. That said it is an interesting idea. It would alter the supply and demand curves for leadership. Its impact upon the shareholders would be that in order to hire the best CEO, they need to pay their low level employees more. It would artificially increase the demand for low level employees.
Seth Garrett	Honestly, I think low level jobs are in danger. Democrats want to provide more and more benefits to the bottom half of society but they do more hurt than help. Obamacare, minimum wages, and HR costs are making "low level" employees more and more expensive and therefore reducing the quantity of jobs. The truth is low level jobs are more likely to be replaced by technology (atm machines, Walmart self-checkout) etc. Why pay someone $20,000 a year plus $2,000 in benefits and $2000 in admin costs if a robot can be purchased to do their job every year? A quality education will become more important in years to come. The fix is not to make low level jobs even more costly. The fix is to empower people to create more value so that they will be worth more than a machine to a business. The economy will grow when we learn how to produce more value with the same number of people.
Ric Stubbs	Would it increase demand for low-level employees? It seems like American companies would just do what they always do when someone tries to stand up for workers; threaten to out-source the work entirely to a foreign country. That's why the minimum working wage has depreciated in real terms since the 1970s. In a consumer-driven economy, is that outcome even beneficial? How are we supposed to buy all these goods produced in foreign countries while the real median income depreciates? More debt?
Seth Garrett	Ric you bring up another good point with outsourcing.
Seth Garrett	One thing people don't realize enough is that anyone can become a CEO. I am a CEO actually. But that doesn't mean I make a bunch of money. I have made zero dollars of my business because I haven't put enough risk into it. There is a lot of risk in starting up your own business (getting loans, hiring people). Its hard to be successful. People choose lower wages because there is less risk than being an entrepreneur.
Seth Garrett	The market chooses to pay CEO's 2000x the low level employees salary because CEO's bring more 4000x more value to the table. CEO's make decisions that either make or break a company. Billions of dollars of investments are at stake. The CEO must decide whether or not to double the investment or lose it all in poor choices. That is why they are paid so much. There is a lot of demand for the best CEOs and few in supply.
Ric Stubbs	That's the popular mythology we tell ourselves in America, but is that even a measurable thing? Is the value of a CEO just arbitrary, and therefore possibly illusory? How do you measure the value of a CEO?
Seth Garrett	Free market principles naturally measure the value of CEOs based on what investors are willing to pay them. No one if forcing Board of Directors to pay CEO's huge salaries, it is just worth it to them. Same principle applies to bananas. Should we force a limit on the price of kiwis vs bananas? Or should we let people decide when the value is?
Ric Stubbs	Which 'people' are doing the deciding? CEOs salaries are not democratically decided; they are determined by a few privileged individuals who have a lot to gain from maintaining or expanding a system that benefits the big wig in the CEO's chair. Even, as the article mentions, when shareholders are asked to ratify CEO pay packages, those votes are non-binding, and let's not imagine that shareholders are a cross-section of the population; no, they are largely held by mutual funds, who also have vested interests in the system as it is. We do not have a free economy, we have two economies; one where you and I try to pound out a living to buy enough stuff to become comfortable, and another entire economy above us in the stratosphere where billions move daily from one mutual fund to another. To think that the latter is going to equitably reflect or even consider the former is suspicious at best, and historically has proven the extremely rare exception, not the rule. In short, yes, it is the free market principles guiding these salaries, but the free market is simply creating undesirable results, which then feeds into a vicious cycle where the income gap expands, decreasing the chances for economic mobility and erecting more and more protective barriers around the plutocracy. It's a problem in the structure of the free market system, and it needs some kind of structural remedy.
Ric Stubbs	To put it another way, the CEO salary problem looks the way it is because that "market" is actually only occupied by a very small number of people who are actually involved in those kinds of transaction. Most of the workers in the country are excluded from the get-go. So yes, the free market is working to the benefit of all those that are actually in that market, but there are huge externalities that are very damaging. Where there are externalities, we use laws and regulation to keep everything equitable, and to keep the market fair. The labor market is only regulated on one side, so there will continue to be externalities. That being said, I am at a loss as far as what effective regulation would look like, since these large companies are all international entities that can simply avoid whatever jurisdiction threatens their (the closed, upper economy's) interests.
Seth Garrett	The problem with the supply of CEO types is that they are not necessarily dependent upon a company's salary. If they are not offered a large enough salary, they might start their own business, become a 100% owner, and then take all of the profits. These types of people have large opportunity costs involved in accepting positions. The only way to get them is to offer them the big bucks. We have to respect the fact that the right to property is a part of our constitutional God given rights. It is legal to own a business and perfectly reasonable to obtain the profits of said business. No one should say that a 100% owner only has 12% rights to his own profits.
Seth Garrett	The reason there is such a big economic divide is because "right to property" includes both disposable assets and appreciable assets. The poor (often by necessity) spend most of their money on disposable property/services, while the rich are purchasing assets that increase in value over time.
Ric Stubbs	The right to property is a Constitutional right? I must have missed that amendment. So by your own analysis, the "free market system" is predisposed to widening the income gap and decreasing economic mobility? That without outside intervention society will move out of the middle-class towards the "haves" and the "have nots," where what is being had is appreciable assets? Is that not a problematic system?
Seth Garrett	I’m not saying its perfect, but it is based on freedom. You choose what assets you purchase. If poor people would buy less Xbox games and more stocks, they might slowly climb out of their economic position.
Ric Stubbs	Or they might lose it all. Stocks should not be held up as the road out of poverty - it either requires a huge investment, a really long time, or most often both for that to significantly increase one's net worth. And there's an equal chance of watching that money disappear as there is of it lifting you out of poverty. The poor, in general, do not have the disposable income to feed a habit like that, nor the time to wait for it to appreciate significantly. What they need is a healthy income for the work they do. That doesn't come from stocks, it comes from wages. Do some people use their resources unwisely? Yes, both rich and poor. The difference is that one group rarely, if ever, suffers much more than buyer's remorse, while the other is vilified and impoverished, starved and sometimes incarcerated for the same lapse of judgment. That's a double standard that such freedom gives us, and its problematic. We can do better.

RAISING THE MINIMUM WAGE

MINIMUM WAGE

Ric Stubbs	Thoughts? http://www.cnn.com/2013/12/02/opinion/trumpka-owens-minimum-wage/index.html?sr=sharebar_facebook
Seth Garrett	No one forces anyone to work for any wage. The concept that businesses are bad for paying minimum wage is silly. The reality is there are more people demanding jobs than supply of jobs. Artificially controlling wages is the same as controlling prices of food. It never works as a good economic model. I don't like the logic behind it. But I do sympathize with the minimum wage earner. I wish there was a better way to solve the problem without free-market principles being compromised.

MINIMUM WAGE

Ric Stubbs	I love these nuggets- "Almost 60 percent of U.S. minimum-wage workers are in either food service or sales. This means, by the way, that one argument often invoked against any attempt to raise wages — the threat of foreign competition — won’t wash here: Americans won’t drive to China to pick up their burgers and fries. Still, even if international competition isn’t an issue, can we really help workers simply by legislating a higher wage? Doesn’t that violate the law of supply and demand? Won’t the market gods smite us with their invisible hand? The answer is that we have a lot of evidence on what happens when you raise the minimum wage. And the evidence is overwhelmingly positive: hiking the minimum wage has little or no adverse effect on employment, while significantly increasing workers’ earnings." Thoughts are of course welcome. http://www.nytimes.com/2013/12/02/opinion/krugman-better-pay-now.html?smid=fb-share&_r=0
Seth Garrett	What happens when businesses realize that robots are more cost effective as fast food workers than artificially expensive human employees?
Seth Garrett	If raising the minimum wage is good, wouldn't raising the minimum wage a lot be better? At what point do you decide to stop raising the minimum wage? Artificial market controls on society are communistic in principle and usually don't work well because you can't fake something’s true value. You can't make a law that says "This high school dropout is worth $100,000 a year." and expect that to literally be the case. Only free markets can determine something’s true value. And that is the point where markets are most productive. When you try to force something to be of more value than it really is it just reduces demand for it.
Ric Stubbs	It's easy to say that only free markets can determine something's true value, but that is one strange definition of true value, don't you think? Does the true value of gold really go up and down as much as the price of gold does? How about Bitcoins? Those don't even exist, but boy are they worth something these days. Capitalism is just one way of distributing wealth (which happens to be extremely efficient in the short-run), and market value is just an indicator of the circumstances of the market, it has no bearing on the intrinsic qualities of the item at all, and therefore it will miss a great deal of an item's 'true value.' An item's value can only ever be realized when in the hands of an individual who intends to use and not sell it. And that value is completely independent of market value. But I've just substituted a different meaning for value; that of use value. As long as our definition of value is arbitrary, we cannot begin to talk about "pricing" people artificially. Measuring true value by exchange value is just one way of determining value, and it is woefully inadequate when talking about human life. Equating market value with the real value of anything is a gross reduction of what things mean in the human experience. A child's favorite toy may be worth little on craigslist, but it means the world to them. Do we say that the child's feelings and relationship with that toy are only worth a couple of bucks because that's what the market says the toy is worth? Or can we admit that market value is just a tool to certain ends, not a God-given indicator of real value? The Church distributes the Book of Mormon for free; is it worthless? Can the free market determine the value of the Book of Mormon? No. Economics, it turns out, is the study of markets, not the study of life. And sometimes it's wrong, and that's OK. Science has been wrong about everything at one point or another, and we go with the new evidence and move on. Capitalism is not a matter of principle, much less of faith; if the evidence says raising the minimum wage a given amount drives up demand, which improves the overall health of the economy and "grows the pie", then it's likely true. Would raising the minimum wage a whole lot be better than just a bit? Probably not, but only because it would be such a shock to the economy. That's why we introduce minimum wage increases incrementally. What happens when robots become cost-effective enough to displace 60% of minimum wage earners? If we insist on valuing people by their market value, then dozens of millions will be unemployed, hungry, on the streets. All of a sudden demand for goods and services will plummet since all the cash is locked up in bank accounts and cash hoards the size of a small nation's GDP. The economy will implode, and only the most powerful corporations will be able to continue to operate. Like any situation where the free market is left to its own devices, it'll polarize itself into a monopoly or a cartel on top, and on the other side of an ever-widening income gap will be a mountain of desperate people. Bad things ensue. When robot labor becomes cost-effective enough to displace the minimum wage work force, though, is a good time to implement a guaranteed living standard. If robot labor is that cost-effective, we can keep people clothed, sheltered, and well-fed for a fraction of what it takes now, and by simply giving people money which is then spent on commodities, the economy will continue to run pretty much as it is now. It's not a utopian solution, since if people aren't dependent on their jobs to eat they'll have large amounts of free time and many won't be mature enough to do something good with it, but economically speaking, the only way to avoid an implosion when robot labor comes online is to just start paying people to live.
Seth Garrett	I agree with what you are saying. I don't necessarily agree with it in principle, but I think you may be right. The future of the world may have to operate on completely different principles than we are used to. I am still trying to figure out a solution to these problems without sacrifice my principles of free enterprise, ownership, and free markets. There has got to be a way to ensure a strong economic future without implementing artificial controls to "spread the wealth".
Seth Garrett	I have been exploring a couple ideas in my mind for the last year. One is the concept of a mandatory legal requirement on employers to issue employees stock in the company after 1 year of service. The other concept is creating a legal right of every person born in America to become a shareholder in all the natural resources within the country.